Why Auspex Pharmaceuticals, Inc. Stock Soared Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of orphan drugmaker Auspex Pharmaceuticals rose by over 40% today on heavy volume after agreeing to a $3.5 billion tender offer from Teva Pharmaceutical Industries . According to the press release,Teva is offering $101 per share in an all-cash deal.

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Looking ahead, Auspex's rare disease products are expected to generate approximately $2 billion in sales for Teva by 2020, and start adding to earnings by 2016. Teva is banking on a key regulatory approval forAuspex's experimental chorea treatment SD-809.

So what: Today's buyout marks Teva's first real steps toward diversifying its revenue base away from the multiple sclerosis, or MS, drug Copaxone ahead of the entry of generic rivals later this year. This is a vitally important move by Teva, given that Copaxone presently makes up over half of the company's specialty drug sales.

Now what: This deal is a good start, but Teva still has problems with its generic drug business that have been largely masked by the strong performance of Copaxone. When its flagship MS drug begins to lose market share presumably in the fourth-quarter, Teva is going to need other new specialty drugs to fill the gap. With a strong balance sheet and a clear need for additional revenue sources, Teva will more than likely remain aggressive on the M&A front for the time being. Stay tuned!